HomeMy WebLinkAboutF-2 Update on Financial Impacts of Reduction Water Sales Information Item
PresentedF-2
AZUSA
-CHI a W.<1E1.
INFORMATION ITEM
TO: HONORABLE CHAIRPERSON AND MEMBERS OF THE AZUSA UTILITY
BOARD
FROM: GEORGE F. MORROW, DIRECTOR OF UTILITIES iftn 4,10.4
DATE: OCTOBER 26, 2015
SUBJECT: UPDATE ON FINANCIAL IMPACT'S OF REDUCED WATER SALES
Since Azusa Light & Water was mandated by the state to reduce water production by 20% from
2013 levels beginning June 1, customers have responded by reducing consumption by more than
28% during June—September when compared to the same months in 2013.
While such conservation level is excellent, the Water Utility will not be able to meet debt
coverage and other financial metrics necessary to maintain adequate credit ratings if reduced
sales levels continue for an extended period. When compared to last year, billing revenues for
June — September have decreased 18.6%, an average of $320,600 per month, due to
conservation.
It is important to note that customers were able to achieve a 28% usage reduction while being in
a 2 day per week watering phase. With one day per week watering beginning on November 1, it
is expected that revenue losses could increase beyond the current 18.6% level. Below is a 3-year
comparison of June—September billings:
June July August September June-September Total
Water Usage and
Billing Revenues Usage Billing Usage Billing Usage Billing Usage Billing Usa CCF Billing
Comparison (CCF) Revenues (CCF) Revenues (CCF) Revenues (CCF) Revenues ! ( ) Revenues
2013 756.937 $ 1,645,576 811,019 $1,735,920 813,455 $1.748,422 826,100 $ 1,755,979 3,207,511 $ 6,885,897
2014 703.965 $ 1.633,003 789.430 S 1,836342 720,913 $ 1,700.072 730,418 $1309,117 2,944,726 $ 6.878,934
2015 504,494 $ 1,259.451 614,859 S 1,477,420 604.342 $1,455,645 583,175 $1,403,942 2,306,870 $ 5.596,458
Change in Usage -252,443 -33.4% -196,160 -24.2% -209,113 -25,7% -242,925 -29.4% -900,641 -28.1%
from 2013
Change in
Billing Revenues $(373,552) -22.9% $(359,322) -19.6% S(244.4271 -14.4% $(305,176) -17.9% 5(1,282,476) -18.6%
from 2014
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Financial Impacts of Reduced Water Sales
October 26,2015
Page 2
A significant portion of the Water Utility budget is fixed costs, (Le. little variable cost
components), therefore, large reductions in consumption results in an under recovery of
revenues. Bond covenants require the Water Utility to maintain a debt coverage ratio of 125%.
This ratio means that Water Fund net operating income must be 1.25 times the cost of annual
debt service payments. Prolonged periods of high conservation without rate changes will result in
rapidly declining cash balances, and are liable to prevent compliance with bond debt service
revenue requirements.
In anticipation of a 20% reduction in sales, the Utility's FY 15/16 retail revenue budget of$15.1
million is $2.2 million below prior year actual revenues of$17.3 million. Due to the $2.2 million
anticipated reduction in revenues, Staff reported to the Utility Board in May that FY 15/16 debt
service coverage is projected to fall below the 1.25x minimum requirement unless modifications are
made to current water rates. Retail revenues for June-September were $510,000 less than budgeted
due to higher than expected conservation.
Some loss of revenues were offset by a special Drought Penalty/Charge, approved by the Utility
Board in June, which began billing in September and generated $167,000 in revenues during the
month. Although the Drought Charge was not adopted as a rate recovery mechanism, but rather to
encourage customers to go the extra mile in achieving the state mandated 20% water reduction target,
revenues from the charge are unrestricted and have some positive impact on debt service coverage.
However, if June — September conservation trends continue throughout the remainder of the
fiscal year without rate adjustments, retail revenues are expected to be over $1.1 million lower
than the $15.1 million projection, and debt service coverage is likely to fall further below 1.0x
even with additional revenues from the Drought Charge and reduced debt service costs from
recent refinancing of 2006 debt.
See below illustration of revised FY 15/16 projections:
Original Revised
FY2015/16 Budget Projections Projections Change Notes
Retail Revenues $15,151,825 $13,999,325 $(1,152,500) Based on June-Sept consumption trends
Other Revenues 3,544,720 3,587,845 43,125 Revised includes estimated Drought Charge
and reduced Water Lease Revenues
Total Revenues $18,696,545 $17,587,170 $(1,109,375)
Total Expenses $14,207,250 $13,968,750 $ (238,500) Reduced production and pumping costs
due to lower consumption
Net Revenues Available $4,489,295 $3,618,420 $ (870,875)
for Debt Service
Total Debt Service $4,659,890 $4,098,415 $ (561,475) Reduction due to 2006 Bond Refinance
Projected Debt Coverage 0.96 x 0.88 x Minimum Requirement is 1.25x
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Financial Impacts of Reduced Water Sales
October 26, 2015
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To remedy this situation, updated water rates are necessary to preserve the financial integrity of
the Water Fund. For this reason, the Utility Board authorized NBS of Temecula, California, to
perform an updated water "cost of service" study for the purpose of examining the Water
Utility's rates to determine if they are adequate to meet revenue requirements given dramatically
reduced sales. Other goals of the study are to ensure that rates reflect current water supply costs;
encourage water conservation; provide the financial metrics needed to maintain adequate credit
ratings; and are sufficient to maintain the required debt coverage ratios as stipulated in the
Utility's bond covenants.
Staff has provided a substantial amount of background data to NBS and the study officially
commenced on September 15. Staff hopes to return to the Utility Board at its November meeting
for rate guidance so that any needed rate changes can be implemented as early as possible this
fiscal year.
Prepared by: Talika M. Johnson, Utilities Administrative and Financial Services Manager
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